Turkiye has witnessed significant tax developments in recent months, including amendments in real estate-related taxation. These changes primarily arise from the need to address budgetary concerns in the current economic climate, which has led to the repeal of certain frequently utilized tax exemption provisions. This article provides an overview of these developments and their implications for taxpayers or investors whose business structures include real estate in Turkiye.
One of the most noteworthy changes which was enacted by Law No. 7456 published in the Official Gazette dated July 15, 2023, is the abolishment of certain tax exemptions related to real estate sales and partial spin-offs. Historically, the Turkish tax system allowed for significant exemptions in the context of real estate transactions, particularly where companies disposed of immovables that had been held for more than two years. These exemptions played a vital role in facilitating corporate restructuring and the transfer of assets without immediate tax burdens. However, Law No. 7456 marks a departure from this approach.
The law has removed several key exemptions, thereby broadening the tax base. The most prominent of this abolishment include the elimination of corporate tax and value added tax exemption on real estate sales. Before July 15, 2023, a partial (50%) corporate tax exemption was applicable for the capital gains obtained through the transfer of immovable held for more than two years. In addition to that, the transfer of these immovables held more than two years were exempt from value added tax. As of July 15, 2023, these exemptions were abolished. However, for immovables already acquired and recorded under assets before July 15, 2023, 25% of the capital gains obtained via their sale might be exempt from corporate tax and value added tax under certain conditions.
These changes, aiming to broaden the tax base are likely to have a significant impact on corporate real estate transactions, potentially leading to a decrease in the frequency of such sales due to the higher tax burden.
With the same law, immovables were excluded from the scope of a tax-free partial spin-off as of January 1, 2024. Prior to this, companies could spin off parts of their business, including immovables, participation shares held for at least two years, and manufacturing/service enterprises without incurring a tax liability. With this new amendment, spin-offs of immovables will now trigger a taxable event, thus requiring companies to carefully consider the tax implications of any planned restructurings. As an alternative method, it might be possible to transfer immovables associated with manufacturing/service enterprises through a partial spin-off, allowing for a tax-free transfer. However, the conditions for such a restructuring process must be carefully evaluated.
Law No. 7524 published in the Official Gazette dated August 2, 2024, also introduced amendments to the taxation of income derived from immovables by real estate investment funds and partnerships. These amendments are significant for both domestic and foreign investors, as they alter the tax landscape for income generated from real estate investments.
Under the previous tax regime, income of investment funds and partnerships derived from immovables were exempt from corporate tax. These exemptions were intended to promote the growth of the investment fund sector by providing favorable tax treatment. However, Law No. 7524 has curtailed these benefits by subjecting the income of investment funds from immovables to corporate tax, unless 50% of the income derived from immovables is distributed as dividends by the end of the second month following the submission of the corporate tax return.
The changes introduced represent a shift in Turkiye’s approach to immovable taxation, moving toward a more stringent tax regime. While the immediate impact of these changes may be a reduction in real estate transactions and a re-evaluation of investment strategies, the long-term effects could include a more stable and predictable tax environment. By broadening the tax base, the Turkish government aims to increase revenue and reduce tax avoidance, which could ultimately contribute to greater fiscal stability. In the meantime, companies and investors must navigate this evolving landscape carefully, reassessing their tax strategies to align with the new legal framework.
By Gokce Sarisu Kanmaz, Partner, and Gorkem Haracci Salar, Senior Associate, Balcioglu Selcuk Ardiyok Keki Attorney Partnership
This article was originally published in Issue 11.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
